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Abstract Both innovating and internationalizing can hold the key to survival and growth among small- and medium-sized enterprises (SMEs). Service innovation in particular is highly relevant in the increasingly digitalized and high-technology global trade. However, there have been until now few studies on service innovation in international entrepreneurship. Thus, in an effort to illuminate its role in entrepreneurial internationalization, the present study examines the profitability impact of service innovation in SME internationalization, while also outlining the differing impacts of entrepreneurial orientation and human capital as the antecedents of both. The empirical data were collected via an online survey of Finnish SMEs in the information and communications technology (ICT) industrial sector, the final sample comprising 104 companies. The data were analyzed through structural equation modeling. The results indicate, first, that entrepreneurial orientation underlies both degree of internationalization and service innovation, yet different dimensions of entrepreneurial orientation have distinct impacts on the two outcomes. Second, we find that the level human capital also determines the level of service innovation in as an antecedent and third, international expansion, but not service innovation, has a negative impact on profitability. We discuss the implications of these results, which imply that SMEs may face an internationalization-innovation paradox in that engaging in both activities may not be a feasible strategic option for them, and that prioritizing internationalizing in favor of innovating may incur costs and result in lower profitability.
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